Raising finance for a franchise is not as daunting as it may seem. Most of the main banks have a dedicated franchise sections that are only too happy to provide finance for the purchase of a franchise, although it should be noted that it is mainly the individuals that they assess, rather than the franchise. The banks are however very interested to see how franchisee's accounts perform and have their own internal records that outline the success levels of many franchise businesses.
People are usually able to borrow more to establish a franchised business than they would for a conventional start-up venture. All the banks recognise that franchising is usually a safer way to get into business and, for established and proven franchise systems, they are prepared to lend, subject to status, up to 70% of the start-up costs including working capital. For a new, or less established franchise, this figure is nearer to 50%, much the same as a conventional business. Usually it is easier to get funding for a British franchise Association member franchise as these franchises have been accredited on merit of good practise and franchisee performance.
Typically the borrowing will be taken as a fixed rate loan repayable over a term no longer than that of the franchise agreement. Variable rate loans are also available if you want to gamble on interest rates. Some of the borrowing could also be taken as an overdraft to provide an element of working capital. Certainly the VAT element of any franchise fee is normally funded by way of overdraft until it is refunded by HM Customs. If you go VAT registered as a franchise business you will soon get the VAT back anyway.
The types of lending discussed so far are normally arranged at local Business Centres and security for any borrowing may be required. Security is usually provided in the form of a second mortgage over property but could also include a charge over surplus cash, insurance policies or stocks and shares. If there is no security available the bank can look for a guarantee, up to 75% of the amount borrowed, from the Department of Trade and Industry’s Small Firms Loan Guarantee Scheme. The remainder is considered as unsecured borrowing. Your bank manager or local Business Link will be able to advise you how to apply for this if required.
Where it is an automotive franchise vehicles or equipment are required for the franchise these can be financed under a lease or hire purchase agreement. Some franchisors will have facilities in place with known companies assisting with this type of finance, such as Lombard Business Finance. The rates on any lending can vary depending on the contribution, security and track record of individuals. Examples of Atomotive franchises can be found at www.selectyourfranchise.com - 20k -
Raising Finance to buy a Franchise - To learn more about this author, visit Nick Strong's Website.
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